South Africa: Budget Review - 2011 Budget Highlights

1. Introduction

On the whole the tax proposals contained in the 2011 Budget seem
fairly evenly balanced between taxpayer and fiscus. As in previous
years perceived areas of tax avoidance are to be addressed but on
the other hand certain areas of unfairness or inequity are to be
reviewed in order to eliminate such effects. In addition the
Minister provided progress reports on various tax proposals which
have been scheduled for future implementation.

In our analysis below we highlight the areas of particular
interest to our commercial clients, without exhaustively
considering all of the tax proposals in detail.

2. Commercial and Corporate Tax issues

On the individual side, but with possible implications for
business, a suggestion is made of a more consistent form of
taxation of all forms of income such as interest, dividends and
capital gains.

The long awaited dividends tax is to take effect on 1 April
2012. Certain technical areas are still under consideration and
outstanding issues include:

the treatment of inbound foreign dividends; and

the treatment of foreign owned South African branches.

So called "dividend schemes" are to be tackled by
treating the dividends as ordinary revenue. The type of schemes
mentioned include certain dividend cessions, dividends from shares
in which the taxpayer has no meaningful economic risk and
arrangements making use of preference shares paying dividends which
are indirectly generated from interest bearing debt.

Relief is to be provided for debt cancellation in respect of
insolvent debtors.

The venture capital company provisions have been poorly
received and will be reviewed.

Islamic finance products which were the subject of
comprehensive legislation last year will receive further
attention.

Government is to consider expanding incentives for labour
intensive projects in Industrial Development Zones.

Several tax policy research projects are underway
including:

taxation of financial derivatives;

taxation of long term insurers;

income tax credit for developers of affordable housing.

An area of significant concern caused by a recent tax case
involves the tax treatment of the transfer of contingent
liabilities in a business sale. The case in issue gave rise to a
denial of certain deductions with a seemingly inequitable result.
It is proposed that this issue is to be addressed. In the case of
taxable asset acquisitions rules will be established to avoid
double taxation or double deductions whilst in tax rollover
transactions it is proposed that contingent liabilities be
completely transferred from seller to buyer. We welcome the
attention of the National Treasury to this issue.

Changes are proposed with respect to interest calculations for
indefinite or indeterminable repayment dates. The proposal is that
a special calculation be used to determine the yield without
reference to a fixed date. It is also proposed that sale of debt
instruments before maturity is to be treated as ordinary
revenue.

Film incentives have apparently been abused and in future will
be transformed into a form of incentive that encourages profit
rather than excess deductions.

Income tax relief for international shipping is under
consideration. A working group will be formed to focus on this
issue and may lead to tax relief.

3. Green Taxes

Last year a carbon tax discussion document was published for
comment. The design features of a proposed tax and the schedule for
its introduction will be announced in the 2012 budget.

The levy applied to electricity generated from non-renewable
and nuclear energy sources is to be increased. Apparently this
should have no impact on electricity tariffs, having already been
taken into account.

4. Estate Duty

The last few years has seen legislative tinkering with estate
duty, measures to curb alleged or perceived avoidance and also an
acknowledgement that the tax is problematic for various reasons
including a potential double tax effect when combined with CGT. It
was anticipated that a substantive announcement would be made
regarding the future of this tax but the only mention has been that
its effectiveness is being reviewed.

5. Share Incentive Schemes

It was recognised that the area of tax continually gives rise
to tax issues because of the variety of share schemes and sizeable
amounts involved. Two specific issues have been identified by the
Minister namely:

the application of the skills development levy or the UIF
contributions in respect of ex-employees – the intention
being to scrap these for such category;

the treatment of employer share trusts to the extent that they
give rise to unintended double taxation or allow for the conversion
of "disguised salary" into tax free dividends.

6. Cross-border tax related changes

Headquarter company regime

During 2010, the headquarter company regime was introduced in
terms of which qualifying entities could rely on certain tax
relief. These measures were intended to encourage the development
of regional investment banks and holding companies in South Africa
and in particular to encourage the use of South Africa as a gateway
to Africa. However, current rules could lead to double taxation and
concerns have also been raised about manner of imposition of
residence based taxation. These concerns will be reviewed.

Controlled foreign company legislation

The main purpose of controlled foreign company
("CFC") rules is to prevent South African residents from
shifting passive income offshore. It is stated that some of these
provisions are overly complex and can interfere with normal
business conduct, whilst others create unintended loopholes.
Amendments will be made to focus the rules whilst still retaining
the purpose.

It has been acknowledged that the restructure by South African
multinationals of their offshore operations often gives rise to
immediate tax, even where the restructured offshore entities remain
wholly under the South African group. An example is where
CFC's, are merged in terms of foreign corporate laws. It is
proposed that tax relief be provided in these circumstances.

Offshore cell companies

It is proposed that offshore cells of cell companies be taxed
as multiple investment entities. This will trigger imputed income
for each party controlling each offshore cell.

Withholding tax on interest

During 2010, legislation governing the 10% withholding tax on
cross-border interest payable by residents to foreign persons was
introduced. This new tax will become effective from 1 January
2013.

Double tax agreements - co-ordination of similar taxes

Double tax agreements apply to income tax and similar taxes. It
is acknowledged that the scope of the term "similar
taxes" is an issue, especially when different double tax
agreements have different lists of similar taxes. Amendments will
be introduced to list all similar taxes (including the impending
dividends tax and interest withholding tax) as explicitly eligible
for tax treaty relief.

Company-structured management investment funds

Mutual and private equity funds often use South African
management to channel the funds. The use of South African
management may trigger significant additional South African tax,
even though the investment funds have a foreign origin and
destination. Certain tax changes during 2010 sought to alleviate
issues for partnership and conduit entities, but do not cater for
instances where offshore intermediary companies are used. It is
proposed that such companies obtain relief from the "effective
management" test to remove the negative tax consequences
associated with South African management.

7. Indirect Taxes

Securities transfer tax

No changes are proposed to securities transfer tax.

Transfer duty

The transfer duty exemption threshold is increased from R500
000 to R600 000.

The following rates will apply:

Value between R600 000 and R1million - 3%

Value between R1 million and R1.5 million – R12 000
plus 5% of the value over R1 million

Value over R1.5 million – R37 000 plus 8% of the
value over R1.5 million

The new rates apply to all purchase agreements concluded on or
after 23 February 2011

Fuel levies

The General Fuel Levy on petrol and diesel will increase from 6
April 2011 by 10 cents per litre. The Road Accident Fund Levy will
be increased by 8 cents per litre, also with effect from 6 April
2010.

VAT

The VAT rate remains unchanged at 14%

Other proposed VAT amendments that are under consideration
include:

the notional input tax deduction on property purchased from
non-vendors will be delinked from the transfer duty which means
that the notional input tax deduction will be equal to the tax
fraction (14/114) of the lower of the selling price, the open
market value, the municipal value or the VAT inclusive purchase
price plus improvements incurred by the seller.

the VAT and customs rules with regard to the temporary
importation of goods will be synchronised;

a minimum exemption for the importation of services of R500
will be introduced and the minimum threshold to import goods exempt
from VAT will be increased to R500;

clarification that the value on which import VAT is payable in
respect of goods enetere for home consumption where the goods were
sold while in a storage warehouse, is the actual sales value;

retroactive apportionment method changes will only be allowed
for periods within current open years of income tax
assessment;

input tax regarding rebate coupons issued by manufacturers will
only be available for non-coupon consideration actually incurred by
the customer;

month-end cut-off periods may not be changed more than once in
a 12-month period.

8. Customs and excise issues

Ad valorem duties

The ad valorem duty on passengers vehicles will increase from
20% to 25% from 1 April 2011 for vehicles over R900 000.

Ad valorem duty on monitors will be introduced at a flat rate
of 7% from 1 April 2011

Excise duty rates

The following rates of excise duty have been amended with
effect from 23 February 2011:

Malt beer - increased by 6.4 cents per 340ml can

Wine – increase by 13.5 cents per bottle

Spirits - increased by R2.86 per bottle

Cigarettes - increased by 80 cents per packet of 2

9. Personal income and employees tax

Tax Rates

Expected annual adjustments have been proposed, most notably is
the introduction of the third rebate of R2 000 per year for
taxpayers who are 75 years and older.

Tax free interest income annual threshold will increase from
R22 300 to R22 800 for individuals below 65 years and from R32 000
to R33 000 for individuals 65 years and over.

Foreign income threshold will remain at R3 700.

National Health Insurance

Further comments are being made about the introduction of the
National Health Insurance ("NHI") which is intended to be
phased in over a period of 14 years. Preliminary indications are
that the NHI will be funded by the phasing in of payroll tax (paid
by the employer), an increase in the VAT rate and a surcharge on
individuals' taxable income as funding options. The feasibility
and practicality of co-payments or user charges will also be
explored. Further announcements will be made in the 2012
budget.

Savings

It is proposed that Government will explore the introduction in
two incentivised savings schemes, one for housing (deposit for
first time home owners) and one for higher education as an
alternative to tax free interest income thresholds. The possibility
of a more consistent tax treatment of all forms of income from
capital such as interest, dividends and capital gains will also be
considered.

Social security and retirement reforms: Contribution to
retirement funds

Currently, employers' contributions to retirement funds on
behalf of employees are not included in the employees' taxable
income. From 1 March 2012:

An employer's contribution will be deemed to be a taxable
fringe benefit and individuals will be allowed to deduct up to
22.5% of their taxable income for contributions to pension,
provident and retirement annuity funds.

Two thresholds will be established – a minimum annual
deduction of R12 000 and an annual maximum of R200 000.

To protect worker's savings, Government proposes to subject
lump sum withdrawals from provident funds to the 1-third limit
currently applying to pension and retirement annuities.

Medical aid

Inflation related increases will be made to the monthly
threshold for tax deductible contributions to medical aid schemes.
From 1 March 2012, these deductions will be converted into tax
credits. A discussion document on these credits will be published
by the end of March 2011.

Compensation from the Road Accident Fund

Compensation, whether paid as lump sum payments or annuities,
will be exempt from income tax.

Taxation of lump sum benefits upon retirement

From 1 March 2011, the tax free lump sum benefit upon
retirement will increase from R300 000 to R315 000.

Capital Gains Tax exclusions

The following exclusions will be increased on 1 March
2011:

For individuals and special trusts from R17 500 to R20 000
annually.

On death from R120 000 to R200 000.

On disposal of a small business when a person is over 55 years
old from R750 000 to R900 000.

Youth employment subsidy

It is proposed that a youth employment subsidy in the form of a
tax credit will be introduced. It will be administered through the
payroll system.

Tax audits and non-compliance

SARS will make more use of data provided by credit bureaus to
build detailed taxpayer profiles and identify non-compliance. SARS
is also extending its cooperation with other tax administrations in
the areas of information exchange, skills transfer and audit.

Withholding tax on gambling winnings.

From 1 April 2012, all winnings above R25 000, including
payouts from the National Lottery, will be subject to a final 15%
withholding tax.

Voluntary disclosure programme

To date, more than 1 200 applicants have come forward under the
programme.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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Certain shares, if held for a continuous period of three years prior to disposal, are deemed to yield capital proceeds in terms of section 9C of the Income Tax Act.

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